PA - Bonus Depreciation

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Federal “Bonus” Depreciation

In March 2002, the Job Creation and Worker Assistance Act (“JCWAA”)(P.L. 107-147) was signed into law. The foundation of this new legislation was the allowance of “bonus” depreciation (IRC Sec. 168(k)). The new “bonus” depreciation provisions provide a special depreciation allowance for qualified properties placed in service after September 10, 2001 and before January 1, 2005. These provisions allow 30% of the assets cost to be immediately deducted in the initial year the property is placed in service.

Qualified property which is eligible for “bonus” depreciation must have a recovery period of 20 years or less and can not be considered IRC Sec. 197 computer software.

In May 2003, the Jobs and Growth Tax Relief Reconciliation Act (“JGTRRA”)(P.L. 108-27) was enacted. This act modified the “bonus” depreciation provision contained in the JCWAA.

The Jobs Growth and Tax Relief Reconciliation Act of 2003 (JGTRRA) increased the immediate deduction from 30% to 50% of the assets cost for property acquired and placed into service after May 5, 2003, and before January 1,2005. This modified provision can be applied to all property, which qualifies for the 30% “bonus” depreciation deduction.

State conformity to the federal “bonus” depreciation provisions provided by the JCWAA and JGTRRA is a major concern for taxpayers, as many states have decoupled in whole or part from these federal tax acts.

PA State Conformity

Pennsylvania does not conform to the federal “bonus” depreciation provisions.

For Personal Income Tax purposes, the state allows any generally accepted depreciation method, including Section 179. However, "bonus" depreciation is not allowed.

For Corporate income tax, “bonus” depreciation is also disallowed. Pennsylvania corporate taxpayers are required to add-back the “bonus” amount as state taxable income. However, in succeeding taxable years, a portion equal to three-sevenths of the taxpayer’s ordinary depreciation deduction under IRC Sec. 167 may be subtracted. This deduction can be claimed until the entire amount of the add-back has been utilized. If any disallowed depreciation exists in the last year the property is fully depreciated for federal users, the remaining amount of add-back may be claimed as a catch-up deduction.

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